TCS Daily

Bleeding-Heart Libertarianism

"I
am a bleeding heart libertarian. Because I'm a nice guy and want to
address society's problems and I want disadvantaged people to become
better advantaged. By instincts and experience I believe that
government seldom delivers the benefits the "bleeding heart liberals"
and "big government conservatives" always seem to hope for. In many
cases government only makes things worse. As with technology and prose,
less is often more. I'm not one of those doctrinaire Big-L Libertarians
who want to eliminate government. My aim is to improve government by
making it smaller. The most important part of this process is to
persuade our fellow citizens to demand less of our government."-- Stefan Sharkansky

Of
the roughly $3 trillion that government in the United States at all
levels collects in taxes of all kinds, close to two-thirds goes to pay
for Social Security, education, and health care. This is the Welfare
State.

The
conventional wisdom is that the intent of the Welfare State is to
reduce the disparity between the unfortunate and the well-off. The
Welfare State supposedly redistributes income and reduces poverty. In
fact, I believe that the Welfare State redistributes poverty and reduces income. As Karl Kraus once said of psychoanalysis, the Welfare State is the disease which it purports to cure.

The Bleeding-Heart Libertarian Approach

To
contrast with the Welfare State, let me offer the Bleeding-Heart
Libertarian approach to income redistribution. Conceptually, it would
involve abolishing public education, all forms of free or subsidized
health care, and Social Security. It would abolish all forms of
taxation other than a tax on personal consumption. All consumer
spending, including spending on education and health care, would be
subject to tax. To assist the poor, there would be a negative
consumption tax, somewhat like the negative income tax that was originally proposed by Milton Friedman.

The entire Bleeding-Heart Libertarian Welfare State can be summarized by the equation:

T = .4C* - $7000

where
T is the total taxes that an individual would pay and C* is the
person's consumption expenditures including spending on education and
health. $7000 is a constant term that creates a personal exemption of
$5000.

For
a family of four, the equation would be T = .4C* - $28,000. Because
there are four people, the constant term gets multiplied by four. Below
is a table that shows how a family of four would be taxed assuming that
it spends exactly 100 percent of its disposable income.

Income

Spending

Taxes

$0

$20,000

-$20,000

$14

$30,000

-$16,000

$28

$40,000

-$12,000

$42

$50,000

-$8,000

$56

$60,000

-$4,000

$70

$70,000

$0

$84

$80,000

$4,000

$98

$90,000

$8,000

$140,000

$120,000

$20,000

I
chose the parameters in order to redistribute as much income as the
current Welfare State, and also to collect enough additional taxes to
fund the remaining functions of government. In the aggregate, personal
consumption spending plus spending on education and health care amounts
to roughly $8.5 trillion. Multiplying (.4) times $8.5 trillion gives
$3.4 trillion in gross taxes, which is roughly what is collected today.
Multiplying $7000 per person times a population of 280 million gives
roughly $2 trillion in total exemptions. Thus, the net tax take of this
system is about $1.4 trillion, which is close to the amount needed to
fund that part of the government that is not the Welfare State.

If
we had a larger exemption, we would have a more generous bleeding-heart
welfare state, but we would not have enough money to fund the rest of
the government. Another way of saying this is that the table above is
indicative of the most redistribution that can be accomplished with a
marginal tax rate of 40 percent.

Remember
that in the table it is assumed that a family consumes all of its
income. Suppose instead that a family with $90,000 in income spends
only $70,000. Because the family would pay taxes only on its spending,
such a family would pay no taxes. If they spent $80,000, the family
would pay $4000 in taxes.

Some
liberals would object that this consumption tax is "regressive." People
with high incomes who choose low consumption would pay less in tax than
people with low incomes who choose high consumption. However, I think
it is a misnomer to call this "regressive." As an economist, I view
consumption as the more reasonable indicator of well-being. There is no
reason to tax people on the income that they save -- to do so reflects
only dogmatic anti-capitalist prejudice.

Winners and Losers

A
low-income family of four would have quite a struggle. Remember, under
the bleeding-heart libertarian approach they have to pay for schooling
for their children. Also, they have to pay for health insurance. There
is no Medicaid, and no freeloading at the hospital emergency room.
There would be no food stamps or other forms of assistance. Only cash
in the form of the negative consumption tax, plus the family income.
For example, with an income of $14,000 supplemented with $16,000 from
the government, such a family would have to afford food, shelter,
education, health care, and everything else on a budget of $30,000.

Does
the bleeding-heart libertarian approach seem harsh? Actually, the
Welfare State is worse. The Welfare State targets much more of its
largesse to people who are less needy. Medicare pays for hospital bills
for everyone over 65, including millionaires. The school districts with
the highest per-pupil spending rates tend to be those with the
wealthiest residents. Many of the elderly who receive Social Security
are well-to-do.

Where
does the Welfare State get the money to fund benefits for the
non-needy? Mostly, it comes from the working poor. Families with
incomes in the range of $15,000 to $40,000 face effective marginal tax
rates of 100 percent, or even more. That is because as their income
increases, they lose eligibility for housing subsidies, food stamps,
Medicaid, and so on; at the same time, their tax burdens rise,
primarily because of the payroll taxes that fund Medicare and Social
Security. In the bleeding-heart libertarian model, a family with an
income of $28,000 would receive a supplement of $12,000 from the
government. Under our current system, such a family would receive very
little government assistance, apart from the "benefit" of a
bottom-of-the-barrel public school. Moreover, it would be subject to
payroll taxes, property taxes, sales taxes, and state income taxes.

The
bleeding-heart libertarian approach systematically redistributes
resources to people in need. The Welfare State arbitrarily creates
winners and losers among people with similar income and spending
circumstances. Compared with the bleeding-heart libertarian model, in
today's Welfare State:

Well-off
elderly who spend a lot on health care are winners. So are people who
choose not to buy health insurance but instead receive free care at
emergency rooms. The working poor who have health insurance and pay
taxes for Medicare are the losers.

Among people who can afford to save for retirement, those who choose not to do so are rewarded with Social Security benefits. Those who do save are punished with taxes on their investment income.

Children
who live in school districts located where there is a lot of
high-priced real estate are subsidized. Children who live in rural
areas and small towns, or children whose parents pay for private
school, are penalized.

To
put it succinctly, the Welfare State makes losers out of people who
want to get ahead through hard work, thrift, or education. Those are
precisely the activities that produce economic growth and social
wealth, and they are hit particularly hard by Welfare State
redistribution.

Politics and the Welfare State

The
Welfare State certainly has well-organized constituencies. The winners,
such as the AARP and the teachers' unions, know who they are. The
losers -- the working poor, children stuck in low-quality school
districts -- have much less political clout. The Welfare State has
friends in both parties, as evidenced by the move to add a prescription
drug benefit to Medicare.

As
the Baby Boomers age, longevity increases, and new medical technology
is developed, the cost of the Welfare State is going to rise.
Economists agree that in another generation the share of GDP required
by the Welfare State will exceed the share of GDP of total tax revenues
today. The outlook for the working poor and other Welfare State losers
is decidedly grim.

The
Bush Administration is undermining the Welfare State by trying to limit
taxes as a percent of GDP. However, no one in either party is willing
to talk plainly about the failures and inequities of the Welfare State.
Those failures and inequities are the crazy aunt that politicians on
both parties try to hide.

Suppose
that the Welfare State is abolished or curtailed, and no redistribution
mechanism is erected in its place. In that case, I am not certain what
would happen to poverty. It certainly would be redistributed: some
current beneficiaries would lose, while some who are trapped in poverty
by the current system would escape. With overall economic growth
higher, we might very well see a decline in overall poverty.

However,
the scheme I outlined above would provide a better alternative. If it
were adopted, there would be improved overall living standards, as a
result of encouraging the activities that lead to growth. Overall
higher living standards, combined with the efficiency of the
redistribution mechanism, would drive out poverty. The working poor
would see their effective tax burdens plummet. Thrifty people would
live very comfortably in their retirement. Access to a good education
would be more equal.

All
things considered, it seems to me that the risk involved in embarking
on a course to abolish the current Welfare State is actually rather
small. I think that there are much better alternatives available, along
the lines of the bleeding-heart libertarian model. Committing ourselves
to the Welfare State as it exists today amounts to robbing the poor.